A Bank Reconciliation Statement Finance Essay

From time to time the balance shown by the bank and cash column of the cash book required to be checked. The balance shown by the cash column of the cash book must agree with amount of cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The balance shown by the bank column of the cash book should always agree with the balance shown by the bank statement, because the bank statement is a copy of the customer’s account in the banks ledger. But the bank balance as shown by the cash book and bank balance as shown by the bank statement seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank, and to test whether the apparently conflicting balance do really agree.

Causes of Disagreement Between Bank statement and Cash book:

Usually the reasons for the disagreement are:

That our banker might have allowed interest which have not yet been entered in our cash book.

That our banker might have debited our account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book.

That some of the cheque which we drew and for which we credited our bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement.

That some cheques or drafts which we have paid into bank for collection and for which we debited our bank account, were not realised within the due date of closing and therefore, not credited by the bank.

The banker might have credited our account with amount of a bill of exchange or any other direct payment into bank and the same may not have been entered in the cash book.

That cheques dishonoured might have been debited in the bank statement but have not been given effect to in our books.

How to Prepare a Bank Reconciliation Statement:

To prepare the bank reconciliation statement, the following rules may be useful for the students:

Check the cash book receipts and payments against the bank statement.

Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.

Make a list of these items.

Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.

Make a list of these items.

Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.

Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways:

(i)  First method (Starting with the cash book balance)

(ii) Second method (Starting with the bank statement balance)

First Method (Starting With the Cash Book Balance):

(a)

If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement.

(b)

If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.

Second Method (Starting With the Bank Statement Balance):

(a)

If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques, drafts, etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on the bank but not yet presented for payment. The new balance will then be agree with the balance of the cash book.

(b)

If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques, drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with the balance of the cash book.

Alternatively:

Information

Cash book shows debit balance i.e., bank statement shows credit balance

Cash book shows credit balance i.e., bank statement shows debit balance

CB to BS

BS to CB

CB to BS

BS to CB

Cheques issued but not presented in the bank

Add

Less

Less

Add

Cheques paid into bank but not collected and credited by the bank

Less

Add

Add

Less

Credit, if any in the bank statement

Add

Less

Less

Add

Debit, if any in the bank statement

less

Add

Add

Less

Example 1:

On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was $1,401 and the balance as shown by the bank statement was 2,253.

On checking the bank statement with the cash book it was found that a cheque for $116 paid in on the 31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31 December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons $29, Bashir & Co. $801, MA Jalil $6, Khalid Bros., $132.

Prepare a statement recording the two balances:

Solution:

Bank Reconciliation Statement on 31st December 1991

 

 

 

First Method:

 

 

Balance as per cash book – Dr.

 

1,401

Less cheques paid in but not collected

 

116

 

 

 

 

1,285

Add cheques drawn but not presented:

 

 

     Rashid & Sons

29

 

     Bashir & Co.

801

 

     MA Jalil

6

 

     Khalid Bros.

132

968

 

Balance as per bank statement – Cr.

2,253

Second Method:

Balance as per bank statement – Cr.

2,253

Less cheques drawn but not presented

968

1,285

Add cheques paid in but not collected

116

Balance as per cash book – Dr.

1,401

Example 2:

On 31st March, 1991 the bank statement showed the credit balance of $10,500. Cheque amounting to $2,750 were deposited into the bank but only cheque of $750 had not been cleared up to 31st March. Cheques amounting to $3,500 were issued, but cheque for $1,200 had not been presented for payment in the bank up to 31st March. Bank had given the debit of $35 for sundry charges and also bank had received directly from customers $800 and dividend of $130 up to 31st March. Find out the balance as per cash book.

Solution:

Bank Reconciliation Statement as on 31st March, 1991

Balance as per bank statement – Cr.

10,500

Add cheques deposited but not credited

750

 

 

11,250

Less cheques issued but not presented

1,200

 

 

10,050

Add bank charges made by the bank

35

 

 

10,085

Less omission in cash book ($800 + $130)

930

 

Balance as per cash book

9,155

Note:

Charges made by the bank $35 have not been recorded in the cash book, therefore, the balance in cash book is more. Add to bank statement balance also.

Dividend and amount from customers received by the bank have not been recorded in the cash book. Therefore, in the cash book there is no entry of $930 (800 + 130). Deduct from the bank statement balance to adjust it according to cash book balance.